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Employee Benefit Tax Relief For Hurricane Katrina

2 October 2005

If you have questions or would like more detailed information, contact The Rigby Group.

Attention: Qualified Plan Sponsors

On September 23, 2005, President Bush singed the Katrina Emergency Tax Relief Act of 2005, H.R. 3769 (KETRA). This legislation has sweeping impacts for plan sponsors with participants in affected areas. Some of the highlights of the new legislation include:

Waiver of the 10% early distribution penalty – The law provides for a “qualified Hurricane Katrina distribution,” which is defined as a distribution from an eligible retirement plan (including a 401(k) plan) made on or after August 25, 2005, and before January 1, 2007, to an individual whose principal place of living on August 28, 2005 is located in the Hurricane Katrina disaster area and who has sustained an economic loss by reason of Hurricane Katrina. Qualified Hurricane Katrina distributions are limited to $100,000 in the aggregate, and they are not subject to the 10% early distribution penalty. Furthermore, qualified Hurricane Katrina distributions are not subject to the 20% withholding that applies to eligible rollover distributions.

Special income tax treatment for plan distribution – Participants who receive qualified Hurricane Katrina distributions have two taxation options. First, they can repay all or part of the distribution within three years by making contributions to an eligible retirement plan. These repayments are treated, for tax purposes, as timely rollover contributions and thus will defer taxation. Second, participants can spread the tax resulting from a distribution over a three-year period.

Participant loan amount increases and deferral of existing loan payments – The new legislation increases the limits on loans from qualified plans to the lesser of $100,000 or 100% of the vested account balance for qualified participants (in general, the limit is the lesser of $50,000 or 50% of the vested account balance). A qualified individual is one whose principal place of living on August 28, 2005 was located in the Hurricane Katrina disaster area and who sustained an economic loss by reason of Hurricane Katrina. In addition, for qualified individuals with outstanding plan loans on or after August 25, 2005, the due dates of loan repayments that occur during the period beginning on August 25, 2005, and ending on December 31, 2006 are delayed for one year. Subsequent repayments are to be adjusted to reflect the delay (including any interest accruing during the delay); also, this one-year period will be disregarded in determining the Code’s maximum loan term (generally, five years) and level amortization requirements.

Our employee benefits experts would be happy to explain these and other important changes and how they will impact your employee benefits plans. Please contact The Rigby Group.

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